SEC Finds Conflicts of Interest at Credit-Rating Agencies

WASHINGTON -- Credit rating agencies failed to properly manage conflicts of interest in assigning top ratings to bonds backed by subprime mortgages and other assets, the Securities and Exchange Commission (SEC) found, according to the Financial Times.

The three agencies that dominate the industry-Standard & Poor's, Moody's Investors Service and Fitch Ratings-have been widely criticized for failing to identify risks in investments tied to high-risk subprime mortgages, the Associated Press reported.

The findings of the SEC probe, expected to be made public this week, follow months of on-site examinations that sought to determine whether the rating agencies diverged from their usual procedures to publish higher ratings for complex financial products tied to mortgages as the sector began to boom, the Financial Times reported.

The agencies have had to downgrade thousands of securities backed by mortgages as home-loan delinquencies have soared and the value of those investments has plummeted, the AP reported. The downgrades have contributed to hundreds of billions in losses and write-downs at major banks and investment firms.

Among the conflicts of interest cited in the SEC report were the practice of companies that issue the securities paying the rating agencies for their work, the AP reported.

The SEC report said that big rating agencies, meanwhile, have "committed to taking remedial measures to address the issues identified," according to the AP.

-- NYSSCPA.org News Staff

Posted on 7/8/08